Pollution And Welfare In The Presence Of Informal Sector: Is There Any Trade-Off?
AbstractWe present a three-sector general equilibrium model with an informal sector, which produces an intermediary for the formal sector, and analyze the effects of different policies on the environmental standard and welfare of the economy. Since the informal manufacturing sector creates pollution, higher the use of informal sector product, higher is the pollution created and higher the discrepancy between actual and permissible levels of pollution, so that the emission tax payable by the formal sector is also higher. The efficiency of a representative worker is inversely related to the level of pollution. In this setup, we show that even if the permissible level of pollution is reduced, the polluting sector may expand and worsen the environmental standard. However, this policy may be welfare improving. On the other hand, an inflow of foreign capital may reduce the pollution level but affect welfare adversely. The paper finds that there might exist a trade-off between the economy’s twin objectives of lowering the level of pollution and improving national welfare. These results are new in the trade and environment literature.
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Length: 25 pages
Date of creation: 20 Oct 2005
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Pollution; informal sector; pollution emission tax; permissible level of pollution; foreign capital;
Find related papers by JEL classification:
- O17 - Economic Development, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements
- O22 - Economic Development, Technological Change, and Growth - - Development Planning and Policy - - - Project Analysis
- O33 - Economic Development, Technological Change, and Growth - - Technological Change; Research and Development; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes
- O54 - Economic Development, Technological Change, and Growth - - Economywide Country Studies - - - Latin America; Caribbean
- Q25 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Water
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